Gas prices joke

Back in 1973, Sheikh Ahmad Zaki Yamani, the petroleum minister of Saudi Arabia, feared that while he was wielding his "oil weapon," the West might wield weapons of its own. Rumors circulated that Washington was considering seizing the Saudi oilfields by force. According to Anthony Cave Brown's Oil, God, and Gold, Yamani "worried that anyone could even suggest it. All the more so because desperate people sometimes do desperate things." Defense secretary James Schlesinger later said, "I was prepared to seize Abu Dhabi. Something small. But nothing big. Militarily we could have seized one of the Arab states. I think the Arabs were quite worried about it after 1973."

Of course, the idea, unlikely to begin with, quickly faded as the West and the Gulf states settled into an accommodation. But the whispered political fantasy from 1973 is experiencing a comeback. There are two principal sources of power for Middle Eastern states and terrorist groups hostile to the West: weapons of mass destruction (see my "Delay or Die?" NR, Dec. 3) and oil. The administration, by giving Saddam Hussein an ultimatum to allow inspectors back into the country, is taking the first step to deal with the weapons threat seriously. But the war on terrorism should also seek at least to diminish the influence of-and perhaps to destroy-OPEC.

The cartel has an anti-Western Third Worldism imprinted on its DNA. It was conceived in the late 1950s in the flush of Nasserite Arab nationalism; it grew to strength in an environment of trendy anti- Americanism in the 1960s and 1970s; and it lives on today as a source of funds for, among other things, weapons, radical Islamic education, and terrorism. An increase in the price of oil from, say, $10 a barrel to $30 transfers tens of billions annually from the American economy to oil sheiks. The sheiks, in turn, spend the money both on their lavish corruption, thus indirectly fostering resentment and Islamic radicalism, and on buying off their militant critics, thus directly fostering resentment and Islamic radicalism.

OPEC's threat is not, as is widely thought, that it might cut off oil to the West. As the Cato Institute's Jerry Taylor tirelessly argues, this is essentially impossible. Although OPEC may be able to sell oil that would have been sold to the U.S. to someone else, there's nothing stopping that third party from reselling it to the U.S., which is what happened during the 1973 embargo. In any case, the Arabs have to sell oil for it to be any good to them; otherwise, they are like a candy store refusing to sell candy. So, as Taylor points out, by December 1973 OPEC was agreeing to a 10 percent increase in production for January, simply because it didn't make sense to forgo revenues.

The problem with OPEC is that it enriches what are to varying degrees nasty, undemocratic, anti-American regimes, from Iran to Venezuela, from Libya to the mother of all contemptible oil states, Saudi Arabia. God played a bad joke indeed by locating more than two-thirds of the world's known oil reserves in the Persian Gulf. It isn't just that there's a lot of it there; it is also easy, and therefore cheap, to get at. The opening sequence of The Beverly Hillbillies, when someone accidentally shoots a hole in the ground and oil ("black gold, Texas tea") sprays out, isn't far from reality in the Gulf. So it is that the Saudis and Kuwaitis can produce a barrel of oil for $1.50 or less, while a barrel can cost about $7 to produce elsewhere (in places like ANWR, the Alaskan reserve).

Given the facts on (or rather under) the ground, op-ed writers often suggest a massive hike in the U.S. gas tax as the best way to lessen dependence on OPEC. It certainly would, but it is political fantasy. The U.S. will never adopt European- or Japanese-style $2-3 a gallon gasoline taxes because, in such a spread-out country, the subway is not really an alternative. The idea suffers as well from a deeper, conceptual flaw. OPEC is a cartel that sticks it to the American consumer. Having the U.S. government stick it to the U.S. consumer instead has important advantages-we would use the dollars to fund retiring baby boomers, not radical sheiks-but it would still be dunning ordinary Americans.

The best way to look at OPEC is not as a domestic problem, but as a foreign-policy one. A concert of foreign powers is conspiring-in the open, around fancy Swiss conference tables stocked with Brita water-to divert billions away from the American economy. The U.S. effort to hit back should begin, at the very least, with suasion. The U.S. government spent over $12 million to fight Bill Gates's supposed monopoly, but barely makes a peep about the oligopolistic behavior of, among others, the anti-American president of Venezuela, Hugo Chavez. Six OPEC members belong to the WTO, which prohibits members from setting quantitative restrictions on imports or exports. Saudi Arabia desperately wants to join. The WTO, then, is a perfect forum for the U.S. to seek relief from OPEC price-fixing.

Another lever of American power is U.S. investment, which can provide the technology and know-how to open up new sources of oil, in Russia, the Caspian Sea, offshore West Africa, and elsewhere. All of which serves to dilute OPEC's market power. The cartel has slipped to 40 percent of world exports today from about 80 percent in the late 1970s. The more sources of oil, the harder it is to corral everyone into a price-fixing scheme and the likelier countries are to cheat on production quotas-like the cheatingest nation around, Russia. The world's second-largest exporter of oil (after Saudi Arabia) sometimes promises to play along with OPEC, but lately has been stiffing it. Russian energy honchos-hucksters slowly turning into bona fide capitalists-have developed a taste for profits, which, for the moment, means selling their product cheaply and trying to gobble up market share.

Efforts to jaw-bone OPEC, or to encourage different international sources of oil, pale in importance before a more direct approach: Like the fight against weapons of mass destruction, the campaign against OPEC begins in earnest with the liberation of Iraq. Unlike barren Afghanistan, the redevelopment of which will be an American act of charity, Iraq is rich in major resources. It is sitting on more than 112 billion barrels of oil, the second-largest proven reserves in the world. Iraqi production declined catastrophically after the Persian Gulf War, but is climbing back to pre-war levels. Amazingly enough, 7 percent of American oil imports are from Iraq.

Oil is always a dictator's best friend, and Saddam is no exception. First, there is the money. Saddam is estimated to make as much as $2 billion per year in illegal revenues, totally outside of the U.N.'s so- called "food for oil" program. Then, there is diplomacy (read: extortion). Iraq has in recent years said it will rip up French contracts to develop Iraqi oil unless Paris opposes U.S. attempts to keep sanctions on Baghdad. Iraq threatens simply to give the business to the Russians. Indeed, the Chinese, French, and Russian support of Iraq in the U.N. is worth billions of dollars to companies in those countries.

So, oil might keep America from confronting Saddam, if the French et al. have their way. But, ideally, it is oil that should help impel the U.S. into Iraq. Before the invasion of Kuwait, Iraq was pumping 3.5 million barrels a day. By 2000, it was back up to 2.6 million barrels. When sanctions are lifted, Iraq hopes to go to 6 million barrels, and even higher. This is an enormous untapped potential that the U.S. currently attempts to suppress through sanctions that both indirectly hurt the Iraqi people and ultimately don't work. Toppling Saddam and installing a pro-Western regime outside of OPEC would be good for Iraqis, enhance U.S. security, and make for a devastating blow against the cartel. Ideally, it would also bring to Iraq a free-market economy, the most important predicate for the political liberalization of the Middle East.

Would the Saudis balk? Chances are that they would have to accommodate themselves to whatever we do in Iraq (there are signs that this is already happening). If not? If the royals turn hostile, or are challenged by radical unrest? Well, so what? Imagine a country run entirely by the House Appropriations Committee, where every possible public-works project is approved to appease some political constituency. Imagine a country run by the spoiled entourage of a rock star, where every whim of every prince is a line item in the national budget. This is Saudi Arabia.